General Assessment of the Macroeconomic Situation
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2
1. General Assessment of the
Macroeconomic Situation
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 20213
Introduction
Prospects for the global economy have improved considerably, but to a different extent across economies.
In the advanced economies, the progressive rollout of an effective vaccine has begun to allow more
contact-intensive activities − held back by measures to contain infections − to reopen gradually. At the
same time, additional fiscal stimulus this year is helping to boost demand, reduce spare capacity and lower
the risks of sizeable long-term scarring from the pandemic. Some moderation of fiscal support appears
likely in 2022 on current plans, but improved confidence and fewer public health restrictions should
encourage households to spend. However, in many emerging-market economies, slow vaccination
deployment, further infection outbreaks and associated containment measures, will continue to hold down
growth for some time, especially where scope for policy support is limited.
Global GDP is projected to rise by 5¾ per cent in 2021 and close to 4½ per cent in 2022 (Table 1.1). The
world economy has now returned to pre-pandemic activity levels, but will remain short of what was
expected prior to the crisis by end-2022. Growth in the OECD area could rise to 5¼ per cent in 2021, led
by a strong upturn in the United States, and then ease to 3¾ per cent in 2022, with strong private spending
helping to ensure that the GDP level returns close to the path expected before the pandemic in most
countries. Output in China has already caught up with this path and is set to stay on this trajectory in 2021
and 2022. Some other emerging-market economies, including India, may continue to have large shortfalls
in GDP relative to pre-pandemic expectations, and are projected to grow at robust rates only once the
impact of the virus fades.
Signs of higher input cost pressures have appeared in recent months, but sizeable spare capacity
throughout the world should prevent a significant and sustained pick-up in underlying inflation. The recent
upturn in headline inflation rates reflects the recovery of oil and other commodity prices, a surge in shipping
costs, the normalisation of prices in hard-hit sectors as restraints are eased and one-off factors such as
tax changes, and should ease in the near term. With unemployment and employment rates unlikely to
attain their pre-pandemic levels until after end-2022 in many countries, there should be only modest
pressures on resources over the coming 18 months.
This benign outlook is subject to significant upside and downside risks related to developments of the virus,
household saving and conditions in emerging-market economies and developing countries:
Substantial uncertainty remains about the evolution of the virus. There is a possibility of new more
contagious and lethal variants that are more resistant to existing vaccines, unless effective
vaccinations are quickly and fully deployed everywhere. This would necessitate the reimposition of
strict containment measures, with associated economic costs related to lower confidence and
spending. On the upside, faster-than-assumed inoculation and effective efforts to supress the virus
before vaccinations are complete would strengthen the recovery in all economies.
Household saving developments are an upside risk, independently of the evolution of the virus,
especially in the advanced economies. The financial assets acquired due to higher household
saving last year could be used to finance pent-up demand instead of being retained, as assumed
in the projections, or used to pay back debt. Given the amounts involved, the spending of only a
fraction of accumulated “excess” saving would raise GDP growth significantly, with ensuing price
pressures as spare capacity is used up. Households could also normalise their saving rates in
2021 and 2022 faster than assumed.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 20214
Table 1.1. A significant but uneven global recovery
OECD area, unless noted otherwise
Average 2020 2021 2022
2013-2019 2019 2020 2021 2022 Q4 Q4 Q4
Per cent
Real GDP growth¹
World² 3.3 2.7 -3.5 5.8 4.4 -0.9 4.4 3.4
G20² 3.5 2.8 -3.1 6.3 4.7 -0.4 5.0 3.4
OECD² 2.2 1.6 -4.8 5.3 3.8 -2.9 5.1 2.4
United States 2.5 2.2 -3.5 6.9 3.6 -2.4 7.4 1.5
Euro area 1.8 1.3 -6.7 4.3 4.4 -4.7 4.6 2.9
Japan 0.8 0.0 -4.7 2.6 2.0 -1.0 1.4 1.2
Non-OECD² 4.3 3.7 -2.3 6.2 4.9 0.9 3.8 4.2
China 6.8 6.0 2.3 8.5 5.8 5.7 5.9 5.2
India3 6.8 4.0 -7.7 9.9 8.2
Brazil -0.3 1.4 -4.1 3.7 2.5
Unemployment rate⁴ 6.5 5.4 7.1 6.5 6.0 6.9 6.4 5.7
Inflation¹,⁵ 1.7 1.9 1.5 2.7 2.4 1.4 3.1 2.4
Fiscal balance⁶ -3.2 -3.1 -10.8 -10.1 -6.0
World real trade growth¹ 3.4 1.3 -8.5 8.2 5.8 -4.7 6.4 4.8
1. Percentage changes; last three columns show the change over a year earlier.
2. Moving nominal GDP weights, using purchasing power parities.
3. Fiscal year.
4. Per cent of labour force.
5. Private consumption deflator.
6. Per cent of GDP.
Source: OECD Economic Outlook 109 database.
StatLink 2 https://stat.link/9hx0m5
The materialisation of this upside risk for advanced economies could add to inflation and in turn
put vulnerable emerging-market economies and developing countries under financial pressure.
Capital outflows and significant repricing of assets, including currencies, could require policy
tightening to regain investor confidence. The increased indebtedness of some emerging-market
economies and developing countries during the COVID-19 crisis has arguably made these
economies more vulnerable to external financial shocks of this kind. At the same time, the
emerging-market economies would benefit from stronger demand from the advanced economies,
offering some offset to tighter financial conditions.
In this uncertain and unprecedented environment, policy makers will have to continue to be flexible and
policies should be contingent on economic developments.
An absolute policy priority is to ensure that all resources necessary are used to deploy vaccinations
as quickly as possible throughout the world to save lives, preserve incomes and limit the adverse
impact of containment measures. Stronger international efforts are needed to provide low-income
countries with the resources needed to vaccinate their populations for their own and global benefits.
The sharing of knowledge, medical and financial resources, and avoidance of harmful bans to
trade, especially in healthcare products, are all essential to address the challenges brought by
the pandemic.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 20215
The current very accommodative monetary policy stance should be maintained in the advanced
economies, and temporary overshooting of headline inflation should be allowed provided
underlying price pressures are contained. Macroprudential policies should be deployed where
necessary to ensure financial stability in a prolonged environment of low interest rates and high
liquidity.
Continued income support for households and companies is warranted until vaccination allows a
significant easing of restraints on high-contact activities. Such measures should be focused on
helping people and supporting companies, particularly in sectors still affected by public health
restrictions, through grants and equity rather than debt. Even after restraints on activities have
been eased, the legacy of the crisis, including over-indebted companies and displaced workers,
will require targeted support to avoid excessive insolvencies and scarring. Stronger public
investment in health, digital and energy infrastructure will also be needed to enhance resilience
and improve the prospects for sustainable growth.
Fiscal policy support should be contingent on the state of the economy. Given the extent of spare
capacity at present, the strong fiscal policy stimulus being implemented this year is appropriate.
Some moderation in support appears likely in 2022, but in part this reflects the planned end of
crisis-related support schemes as the economy reopens, and is warranted provided the recovery
evolves as projected. If upside risks were to materialise, with unexpectedly strong improvements
in the labour market, fiscal support should be eased, and the opposite should occur if downside
risks were to materialise. Ensuring debt sustainability will be a priority only once the recovery is
well advanced, but planning for management of the public finances that leaves space for public
investment should start now.
Macroeconomic policy support needs to be accompanied by structural reforms that strengthen
resilience and economic dynamism and mitigate climate change. Together, these can help to foster
the reallocation of labour and capital resources towards sectors and activities with sustainable
growth potential, raising living standards for everyone.
Many emerging-market economies and developing countries have been hit particularly hard by the
pandemic. In some cases, extensive borrowing abroad to cushion the blow has added to existing
challenges from high sovereign or corporate debt prior to the crisis. While official creditors in the
G20 economies have suspended debt service for the poorer countries temporarily, debt restructuring for
some of the emerging-market economies and developing countries is likely in the coming years in the
absence of debt relief. This process would be facilitated by increased transparency about the full extent of
indebtedness, including contingent liabilities and opaque bilateral loans. Stronger international co-
operation remains necessary to build on the G20 efforts to address debt problems of emerging market-
economies and developing countries.
Recent developments
Prospects for a lasting global recovery continue to improve, helped by the gradual deployment of effective
vaccines, continued macroeconomic policy support and signs that economies are now coping better with
measures to supress the virus. In many countries, the scale of the economic disruption from the pandemic
has been exceptionally large, and the recovery is likely to be prolonged. Global GDP declined by around
3½ per cent in 2020, and OECD GDP by around 4¾ per cent, substantially larger falls than in the global
financial crisis. Output in some European countries and emerging-market economies declined particularly
sharply, reflecting the challenges in controlling the pandemic and the importance of travel and tourism in
many economies (OECD, 2021a). Other countries, including many in the Asia-Pacific region, saw only mild
output declines in 2020, helped by strong and effective public health measures to supress or eliminate the
virus spread, and the regional uplift provided by the rapid recovery in China. In all countries, the burden of
the crisis fell disproportionately on the poorest and most vulnerable.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 20216
The economic upturn since mid-2020 has been uneven and remains far from complete (Figure 1.1). For
the world as a whole, GDP in the fourth quarter of 2020 was still 4% lower than expected a year earlier
prior to the pandemic, representing a real income shortfall of close to USD 5 trillion (in PPP terms).
Differences in statistical procedures have contributed to the cross-country variation in GDP outcomes, but
their effects generally appear to be modest (Box 1.1). The pace of the global recovery moderated in the
first quarter of 2021, with increasing signs of divergence across and within countries, reflecting different
progress in vaccination deployment and renewed virus waves in some economies.
Global GDP growth is estimated to have eased to around 0.5% in the first quarter of 2021
(quarter-on-quarter, non-annualised) (Figure 1.1, Panel A). Momentum strengthened in the
United States, helped by policy stimulus and rapid progress with vaccinations, but renewed output
declines occurred in a number of economies, including the euro area and Japan. Growth also
moderated in China, with gradual policy normalisation now beginning. In aggregate, amongst the
countries with monthly economy-wide estimates of economic activity, output in March 2021
remained around 1½ per cent below the pre-pandemic level (Figure 1.1, Panel B)
Global mobility, measured using the Google location-based measures of retail and recreation
mobility, improved in both February and March but stalled in April (Figure 1.1, Panel C). Mobility
rose in the advanced economies, particularly those where containment measures are being eased
such as the United States, Israel and, from April, the United Kingdom. In contrast, renewed declines
in mobility have occurred in parts of Europe until recently, as well as Latin America and India,
reflecting more stringent containment measures to address renewed virus surges.
Public health measures to reduce the spread of the virus, and the associated declines in mobility,
are now having a smaller adverse impact on activity than in the early stages of the pandemic
(OECD, 2021b). Containment policies are more carefully targeted, and businesses and consumers
have adapted to changes in working arrangements and sanitary restrictions.
Global industrial production has continued to strengthen this year. Global trade in goods has
surpassed pre-pandemic levels (see below), supported by the strong demand for IT equipment and
medical supplies (Figure 1.1, Panel B). However, supply shortages in the semiconductor sector
due to the exceptionally strong demand for IT equipment during the pandemic, and temporary
disruptions to the output of some major producers, are now beginning to constrain output in some
industries, particularly car production.1
Global retail sales volumes have now picked up again, after remaining unchanged for several
months (Figure 1.1, Panel B). Many service sector activities are still affected by health-related
restrictions, and cross-border services trade remains extremely weak, but the gradual reopening
of economies and support from fiscal policy have strengthened demand. Household saving rates
remain above pre-pandemic levels (see below), providing scope for future spending, but consumer
confidence is recovering (Figure 1.1, Panel D).
Business confidence has continued to improve (Figure 1.1, Panel D). In April, the global composite
output PMI rose to its highest level since mid-2010. Manufacturing and, to a lesser extent, services
indicators both strengthened, although not in all major economies.
1
Car production in Germany in the first quarter of 2021 was around 15% weaker than in the fourth quarter of 2020,
with declines of 10% and 7% in the United States and Japan respectively.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 20217
Figure 1.1. The pace of the recovery has moderated in some countries and sectors
A. GDP B. Global monthly activity indicators
Index 2019Q4 = 100 Index Dec. 2019 = 100
108 110
105 105
104
100
100 100
95
96 90
95
World Global industrial production
85
92 China OECD industrial production
United States 90 80 OECD retail sales volumes
88 Euro area 12-country monthly activity indicator
75
Dec 19
Jan 20
Jan 21
May
Aug
Sep
Nov
Dec
Feb
Mar
Feb
Mar
85
Jun
Apr
Oct
Jul
84
2019 2020
C. Google retail and recreation D. Survey indicators
community mobility trend
% change from visits in period Jan 3 - Feb 6 2020 Index
0 101.0 60
-10 100.5 55
-20 100.0 50
-30 99.5 45
-40 99.0 40
-50 World
98.5 35
-60 98.0 30
Advanced economies
-70 India 97.5 25
-80 United States ← OECD consumer confidence
97.0 20
Euro area Global composite output PMI →
-90 96.5 15
Mar 20
Jan 21
Jan 20
Jan 21
Jul 19
May
May
May
Aug
Sep
Nov
Dec
Aug
Sep
Nov
Dec
Aug
Sep
Nov
Dec
Feb
Mar
Feb
Mar
Feb
Mar
Jun
Apr
Oct
Apr
Jun
Oct
Apr
Oct
Apr
Jul
Jul
Note: Data in Panel B and Panel C are PPP-weighted aggregates. The retail sales measure uses monthly household consumption for the
United States and the monthly synthetic consumption indicator for Japan. The 12-country activity indicator uses GDP or economy-wide output
data for Argentina, Brazil, Canada, Chile, Colombia, Finland, Japan, Korea, Mexico, Norway, Sweden and the United Kingdom. Data in Panel C
based on information up to May 15, 2021. OECD consumer confidence in Panel D is a standardised measure.
Source OECD Economic Outlook 109 database; Google LLC, Google COVID-19 Community Mobility Reports,
https://www.google.com/covid19/mobility; OECD Main Economic Indicators database; Refinitiv; and OECD calculations.
StatLink 2 https://stat.link/ictb50
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 20218
Box 1.1. The impact of the pandemic on the measurement of GDP
The pandemic affected all countries’ GDP in 2020 but with some noticeable disparities (Figure 1.2,
Panel A), including sizeable differences across countries in the relative declines of nominal and real GDP,
and implicitly in the GDP deflator. Cross-country variation in observed GDP outcomes arises from many
different sources, including the timing and severity of the pandemic and the associated policy responses,
the different sectoral mix of economic activities in each country, and differences in statistical procedures.
This box explores the extent to which one particular statistical difference – the treatment of non-market
services – accounts for some of the variation in real GDP growth across countries during 2020. While
marked differences can be seen in the contributions from non-market services across countries, these are
generally small relative to the overall changes in GDP and make little difference to the relative GDP
declines across countries. These issues will remain pertinent in 2021, given the renewed shutdowns and
subsequent reopenings that are occurring.
Figure 1.2. The pandemic had a diverse impact on GDP across countries
A. GDP growth in 2020 B. Real GDP growth
% %
2 10
0
5
-2
0
-4
-6
-5
Real 2020Q2 / 2019Q4
-8
Nominal 2020Q4 / 2020Q2
-10
-10
-12 -15
OECD
OECD
WLD
WLD
KOR
GBR
KOR
GBR
DEU
CAN
DEU
CAN
AUS
USA
AUS
USA
FRA
ESP
FRA
ESP
JPN
JPN
ITA
ITA
Note: Countries are ranked according to real GDP growth in Panel A and to real GDP growth between 2020Q2 and 2019Q4 in Panel B. In
Panel B, the data correspond to the average quarterly growth rate over the two quarters.
Source: OECD Economic Outlook 109 database; and OECD calculations.
StatLink 2 https://stat.link/2uy06d
Estimating the volume of output in the health and education sectors is challenging as output is often
supplied without charge or at prices that are not economically significant. Different conventions exist across
national statistical institutes (NSIs) to compute the volume of non-market services: using deflated
measures of input values, or direct volume measures of either inputs (such as the number of employees
or hours worked) or outputs (such as the number of students or number of patients treated) (OECD,
2020a).
The COVID-19 pandemic has added to these longstanding issues, with both sectors heavily affected by
restrictions. For instance, workers may be paid as before during shutdowns but provide a reduced volume
of services. This results in differences between approaches that deflate input costs (such as the wage bill,
which did not change) or measure the volume of activities via inputs (such as the number of teachers,
which did not change) or outputs (such as the number of students coming to school, which did change).
Services may also be delivered in different ways, such as the partial replacement of school-provided
education, which is included in GDP, with unpaid home schooling, which is not. Adjustments may also be
needed to capture new activities, such as the introduction and rapid expansion of test, track and trace
services, and more recently vaccinations, with associated technical issues of whether the weights given to
these new activities are appropriate. The pandemic also temporarily revamped many health services from
traditional to COVID-19-related care. All these factors may have reduced the comparability of economic
outcomes across countries.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 20219
The UK Office for National Statistics is one of the few major NSIs to follow the volume indicator approach
for most health and education outputs (ONS, 2021), which is recommended by the European System of
National Accounts (Eurostat, 2020a). Other statistical agencies, including the US Bureau of Economic
Analysis, have made ad-hoc adjustments to their standard approaches to try to capture particular aspects
of changes due to the pandemic (BEA, 2020). Although different statistical methods may have led to some
divergence in reported output declines during the pandemic, the return to normal should reverse such
divergence, with larger output gains from reopenings in those countries that use specific output-based
measures of the volume of services. Countries that experienced the largest GDP contractions during the
first half of 2020 typically had a stronger rebound in the latter half of the year (Figure 1.2, Panel B).
The extent to which these statistical factors can help to account for observed cross-country differences in
real GDP growth during the pandemic can be assessed by looking at the contribution to real GDP growth
either from government consumption (expenditure approach) or from the output of non-market services
(output approach). These two approaches are related, but distinct, given that there are differences across
countries in the mix of publicly and privately provided non-market services (with private consumption the
main expenditure counterpart to the latter). A comparison using annual growth rates for 2020, 1 instead of
specific quarters or semesters, reduces the risk of bias from distinct outbreak timings (including for the
different waves). Looking across countries:
Using the expenditure approach, the contribution from government consumption is the most
negative for the United Kingdom (about 1.5 percentage points) and the most positive for Australia
(about 1.5 percentage points) (Figure 1.3, Panel A). Nonetheless, the countries with the largest
GDP declines typically also had the largest negative contributions from expenditure excluding
government consumption.
The gross value added breakdown shows the relatively large negative contribution from non-
market services for Chile (1.9 percentage points) and the United Kingdom, but a positive
contribution in a few countries (Figure 1.3, Panel B). However, as with the expenditure approach,
the countries with the largest declines in total real value-added output typically had the largest
negative contributions from output excluding health, education and public administration.
Overall, differences in government consumption and non-market output account for only a small part of
the cross-country variation in annual GDP growth in 2020.
_______
1. An alternative exercise using the growth rate over 2019Q4-2020Q4 reaches a similar conclusion.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 202110
Figure 1.3. Differences in government consumption and non-market output account for only a
small part of cross-country variation in GDP growth
Contribution to real output growth in 2020, in percentage points
A. GDP, expenditure approach B. GVA, output approach
% pts % pts
2 2
0 0
-2 -2
-4 -4
-6 -6
Government consumption
-8 -8 Public administration, health and education
Other Other
-10 -10
Total Total
-12
-12
OECD
MEX
GBR
ARG
RUS
DEU
CAN
TUR
AUS
USA
BRA
FRA
ESP
JPN
ZAF
SWE
IDN
IND
NOR
HUN
GBR
CHE
DNK
DEU
ITA
TUR
POL
NLD
CZE
CHL
AUT
FRA
ESP
BEL
ZAF
FIN
ITA
Note: Countries are ranked according to real GDP growth in 2020 in Panel A and to real gross value added (GVA) growth in 2020 in Panel B.
Public administration, health and education corresponds to the ISIC rev4 item aggregating: public administration; compulsory social security;
education; and human health.
Source: OECD Economic Outlook 109 database; OECD, Annual National Accounts database; and OECD calculations.
StatLink 2 https://stat.link/q784d2
Global merchandise trade indicators continue to rebound (Figure 1.4, Panel A), helped by stronger global
demand for personal protective equipment and IT goods, and the gradual release of pent-up demand for
durable goods in some advanced economies. Container port traffic and total merchandise trade volumes
are now above 2019 levels, helped by the strong trade rebound in Asia. In contrast, services trade remains
soft, particularly air traffic, with total commercial flights in April around 32% lower than on average in 2019,
and international air passenger traffic revenue in March still 88% lower than two years earlier.
Despite continued uncertainty, investment has rebounded in many economies since mid-2020, helping to
underpin the trade upturn (Figure 1.4, Panel B). In the fourth quarter of 2020, aggregate investment in the
G7 economies was unchanged from a year earlier, whereas private consumption remained almost
4½ per cent lower than prior to the pandemic, and investment surpassed the pre-crisis level in several
large economies, including the United States, Turkey and Brazil. Business equipment investment has been
spurred by new investments in the equipment and systems needed for remote working and, in some
emerging-market economies, low real interest rates and quasi-fiscal credit supply. Housing investment has
also picked up, especially in North America, helped by favourable financing conditions and only limited
restrictions on construction activities. Substantial government support has also enabled many firms to stay
in business and helped to ensure the continued availability of external finance (see below).
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021 11
Figure 1.4. Merchandise trade is above pre-pandemic levels, helped by a recovery in investment
A. Global merchandise trade indicators B. Growth of investment and private consumption
% change over year to 2020Q4, constant prices
Y-o-y % changes Indice
20 ← CPB merchandise trade 70 16
15 ← Container port traffic 65
← Air freight
12
10 60
PMI new export orders → Investment
5 55 8
Private consumption
0 50
4
-5 45
-10 40 0
-15 35 -4
-20 30
-8
-25 25
-30 20 -12 0
Nov 18
Jan 19
Jan 20
Jan 21
OECD
KOR
GBR
CAN
RUS
DEU
May
May
BRA
TUR
USA
AUS
Sep
Nov
Sep
Nov
FRA
Mar
Mar
Mar
JPN
Apr
IND
ITA
Jul
Jul
Source: OECD Economic Outlook 109 database; CPB Netherlands Bureau for Economic Policy Analysis, Institute of Shipping Economics and
Logistics (ISL) and RWI - Leibniz-Institut für Wirtschaftsforschung (RWI), International Air Transport Association (IATA); IHS Markit; and OECD
calculations.
StatLink 2 https://stat.link/v12roh
Across the OECD economies, around 7½ million more people than prior to the crisis remained unemployed
in March, inactivity rates have risen and aggregate employment rates have declined. Women, youth and
low-income workers have been particularly exposed to the risk of job losses during the pandemic. In the
fourth quarter of 2020, the labour force participation rate and the employment rate in the median OECD
economy were 0.3 and 1 percentage point lower respectively than a year earlier (Figure 1.5, Panel A).
Relatively large declines occurred in the United States and many emerging-market economies, but job
retention measures, such as short-time work schemes and wage subsidies, continued to help preserve
employment in Europe and Japan. In developing countries, substantial job losses have increased poverty
and deprivation for millions of people.
Many jobs remain precarious. In most major economies, even those in which employment has been
preserved, total hours worked in customer-facing service sectors remain well below the pre-pandemic level
(Figure 1.5, Panel B). Aggregate hours worked in these sectors account for between 25-30% of total
economy-wide hours worked in most economies, and over 35% in Italy and Spain. In Australia, Canada
and the United States, where aggregate labour market conditions and hours worked continued to improve
in the first quarter of 2021, shortfalls in hours worked still remained in the most affected sectors.
However, new job opportunities have begun to appear in most countries, despite continued containment
measures. This is reflected in rising online job postings (Figure 1.6), though the gains remain uneven. Job
growth is largely concentrated in healthcare and the production sector, with job postings in several service
sectors remaining below the immediate pre-pandemic level. Survey evidence in the United States also
shows signs of skills shortages for small businesses, possibly reflecting lower labour force participation
and the separation of some employer-employee job matches during the early months of the pandemic.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 202112
Figure 1.5. Labour market conditions remain weaker than prior to the pandemic
A. Employment and participation rates B. Total hours worked by sector
in 2020Q4 in 2021Q1 or latest available
% pts change from 2019Q4 % change from 2019Q4
1 Higher-contact Lower-contact All
2
0 0
-2
-1
-4
-2 -6
-8
-3
Employment rate
-10
-4 -12
Participation rate
-14
-5
-16
-6 -18
MEX
GBR
KOR
CAN
DEU
BRA
USA
TUR
AUS
CAN
DEU
AUS
USA
ESP
FRA
FRA
ESP
ZAF
JPN
JPN
ITA
ITA
Note: Panel A: employment and participation rates are calculated as a share of the population aged 15-74. Panel B: data for 2020Q4 in France
and Italy and 2021Q1 in all other countries. Economy-wide data for hours worked in all economies apart from the United States, where the data
refer to total hours worked by private non-farm employees. For Japan, estimates are based on total employment and average monthly hours
worked by employed persons. Higher-contact sectors are ones with high social interactions between consumers and producers. These include
retail and wholesale trade, accommodation and food services, transportation and storage, arts and entertainment, and other personal services.
Lower-contact sectors are all remaining sectors.
Source: OECD Economic Outlook 109 database; Bureau of Economic Analysis; Statistics Canada; Australian Bureau of Statistics; Statistics
Bureau, Japan; Eurostat; Office for National Statistics; and OECD calculations.
StatLink 2 https://stat.link/bayw6s
Figure 1.6. Online job postings are now above pre-pandemic levels in some countries and sectors
A. New online job postings by country B. New online job postings by sector
% change from early February 2020 % change from early February 2020
May 21 Dec 20 Apr 20
Australia Production
United States Healthcare
Canada
Total
Italy
Business & finance
Germany
Office & admin support
France
Food & beverage
United Kingdom
Japan Customer & personal services
Mexico Education
-60 -50 -40 -30 -20 -10 0 10 20 30 40 50 -50 -40 -30 -20 -10 0 10 20 30 40
Note: Seasonally-adjusted online job postings by type of occupation, aggregated over 20 OECD countries.
Source: Indeed; and OECD calculations.
StatLink 2 https://stat.link/mhkwr8
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021 13
Figure 1.7. Equity prices and some currencies have strengthened since late-2020 in contrast to
some bond prices
A. Equity prices B. 10-year government bond yields C. USD nominal exchange rate
% change % pts change % change
KOR TUR ZAF
FRA BRA
AUS
RUS
RUS
ITA CAN
AUS
MEX GBR
CAN
EA17
MEX BRA
SAU
DEU USA MEX
ZAF KOR
RUS
TUR GBR
CHN
USA FRA
BRA EA17
DEU
GBR EA17 IDN
JPN
ITA KOR
IND
IND
CAN IND
JPN
AUS SAU
CHN
IDN Appreciation
TUR
ARG IDN against the USD
CHN ZAF JPN
-5 0 5 10 15 20 25 30 35 40 -1 0 1 2 3 4 -10 -5 0 5 10 15 20
Note: Change since early November 2020, based on a 10-day average of daily observations.
Source: Refinitiv; and OECD calculations.
StatLink 2 https://stat.link/idf6sy
Financial conditions have evolved differently among asset classes and large economies since late last
year (Figure 1.7). Equity prices have increased strongly in most large advanced and emerging-market
economies, driven by anticipation of a faster recovery due to vaccinations and increased government
support in a number of countries. A better economic outlook and expectations of higher inflation,
particularly in the United States, have boosted 10-year government bond yields in advanced economies.
This bond yield increase has been smaller in the euro area. In several large emerging-market economies
the decline in government bond prices (which move inversely to yields) also reflected a reversal in global
risk appetite and domestic policy and economic challenges, though many currencies have recently
appreciated against the US dollar (see below).
The outlook is for a significant but uneven recovery
The global recovery is projected to strengthen as vaccination deployment
becomes widespread
The emergence of effective vaccines has improved prospects for a durable economic recovery provided
such vaccines can be deployed rapidly throughout the world and supportive fiscal and monetary policies
continue to underpin demand. However, considerable uncertainty remains about near-term developments,
with high levels of infections still occurring in some countries, and the pace at which the most heavily
affected economies and sectors can recover. It will take some time before production can be raised
sufficiently and vaccines distributed to all in need, and risks remain from potential mutations of the virus
resistant to current vaccines. Vaccination campaigns are proceeding at different rates around the world
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 202114
(Figure 1.8), often starting more slowly than initially planned, and the scale of policy support and sectoral
specialisation differ considerably across economies. Some targeted restrictions on mobility and activity
may still need to be maintained for some time, particularly on cross-border travel. This will affect the
prospects for a full recovery in all countries, even ones in which vaccinations are proceeding quickly or in
which the incidence of the virus is very low.
Many countries have announced new fiscal measures or prolonged emergency support schemes in recent
months. As a result, there is more fiscal support this year than had seemed likely late last year, reducing
the risk of lasting costs from a prolonged recovery. 2 The impact of stronger fiscal support will depend in
part on the measures undertaken. Stronger government consumption and investment will feed through to
final demand directly, but additional household income support may be saved or used for debt repayments
by some households, especially while containment measures are in place (see below).
The large fiscal stimulus in the United States this year will help to strengthen the global recovery. In
particular, the American Rescue Plan of USD 1.9 trillion could raise US output by between 3-4% in the first
full year following implementation (the four quarters to 2021Q1), and global output by around 1% (OECD,
2021b). All economies benefit from stronger demand from the United States, with output rising by between
½-1 percentage point in Canada and Mexico, both close trading partners, and between ¼-½ percentage
point in the euro area, Japan and China.
Figure 1.8. The pace of COVID-19 vaccinations differs substantially across countries
Vaccinations per hundred people, May 17 2021 or closest available
70
At least one dose - Since end-March
60
At least one dose - End-March
Fully vaccinated
50
40
30
20
10
0
SWE
NOR
GRC
WLD
GBR
HUN
CHN
ARG
MEX
KOR
CAN
DEU
DNK
CHE
RUS
USA
SVN
TUR
BRA
AUS
COL
CHL
AUT
ESP
PRT
POL
NLD
FRA
CZE
SVK
LUX
EST
BEL
LTU
LVA
NZL
JPN
ZAF
CRI
IND
IDN
ISR
FIN
ITA
IRL
ISL
Note: For Australia and China, total vaccinations are used for people who have received at least one dose.
Source: Our World in Data vaccination database, accessed May 19 2021.
StatLink 2 https://stat.link/y60u5p
2
For the OECD as a whole, fiscal easing of around 2¼ per cent of potential GDP is now projected in 2021 based on
changes in the underlying primary government balance, a conventional though uncertain measure of the fiscal stance.
In contrast, the December 2020 OECD Economic Outlook projected a fiscal tightening of just under 1½ per cent of
potential GDP this year.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021 15
The balance between the key factors shaping the projections differs across economies:
In the advanced economies, the progressive rollout of an effective vaccine is assumed to be
completed by the autumn of 2021, and much earlier in some countries, allowing restrictions on
contact-intensive activities to be rolled back. New fiscal measures will also support demand in the
near term in several countries, with the impat of income support for households on spending
gaining traction as economies reopen. Improvements in confidence and labour market conditions
and a decline in household saving ratios are also expected to help maintain spending growth in
2022, offsetting a moderation in fiscal support.
Prospects for early completion of vaccinations are limited in many emerging-market economies,
with Chile a notable exception. Current and further virus outbreaks in some countries are assumed
to require tighter public health measures to be maintained in the near term. Scope to provide
additional macroeconomic policy support is also limited in many countries. Commodity exporters
should benefit from high commodity prices and the revival of global merchandise trade, but tourism-
dependent economies face a slow recovery, and household real incomes will be adversely affected
by higher energy and food costs.
Based on the assumptions set out above, the global recovery is projected to strengthen gradually,
particularly in the latter half of this year, with global GDP projected to pick up by 5¾ per cent in 2021, and
close to 4½ per cent in 2022 (Table 1.1; Figure 1.9). OECD GDP is projected to rise by around 5¼ per
cent in 2021 and 3¾ per cent in 2022. Output in some countries, notably China, has already surpassed
the pre-pandemic level, and by mid-2021 global GDP and US output should do so as well. Other countries
are recovering more slowly, including many in Europe (Figure 1.9, Panel C). Considerable heterogeneity
in near-term developments is likely to persist, both between advanced and emerging-market economies
and between wider regions. The risk of lasting costs from the pandemic also remains high, with global
output projected to remain weaker at the end of 2022 than expected prior to the pandemic (Figure 1.9,
Panel D). This is particularly the case in many emerging-market economies, with the output shortfall in the
median economy at the end of 2022 projected to be around 3½ per cent, more than twice that in the median
advanced economy.
Near-term developments and prospects differ substantially between economies over the next 18 months.
In the United States, GDP growth is projected to be close to 7% in 2021, before easing to around
3½ per cent in 2022. Fiscal support is providing a considerable boost for growth and confidence
and labour market indicators are improving, helped by the gradual reopening of the economy and
the relatively advanced pace of vaccinations. Accommodative monetary policy should continue to
support investment, particularly in the housing market, and a gradual return of the household
saving rate towards pre-pandemic norms should support private consumption as the impact of
fiscal support wanes next year. The American Jobs Plan and American Families Plan are not
incorporated in the projections, but if implemented would boost growth in 2022.
The recovery in Japan has slowed, with GDP declining in the first quarter of 2021. Strong external
demand is helping to support manufacturing activity, but public health measures are checking
private consumption and service sector output. Economy-wide activity should gradually pick up
through 2021-22 as the vaccine rollout gains pace, with GDP projected to rise by 2½ per cent this
year and 2% in 2022. The fiscal stance is set to tighten this year and in 2022, but strong public
investment and external demand will help to underpin activity, along with reductions in the
household saving rate.
Euro area output declined in the first quarter of 2021, with private consumption and service sector
activity held back by stringent containment measures. However, strong external demand is
boosting manufacturing activity and short-time work schemes have preserved employment. Activity
is expected to strengthen through 2021 as vaccination deployment gains momentum and
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 202116
restrictions are lifted progressively, with GDP rising by just over 4¼ per cent this year, and close
to 4½ per cent in 2022. Fiscal policy is expansionary this year and mildly restrictive in 2022, with
Next Generation EU funds assumed to help support investment during the projection period and
some crisis-related measures being phased out as the recovery strengthens. Accommodative
monetary policy should help business investment recover gradually, and private consumption
should be boosted by pent-up demand and a decline in household saving rates.
Robust growth is expected to continue in China, with GDP rising by around 8½ per cent this year
and 5¾ per cent in 2022. Export growth is buoyant, pushing up the current account surplus, and
monetary policy remains accommodative, but some fiscal policy support is being withdrawn this
year and credit growth is moderating gradually. Progress in rebalancing the economy from
industrial production and investment to services and private consumption has been interrupted by
the pandemic, but should resume as the vaccination rollout gains pace and confidence improves.
Significant financial risks remain, particularly from elevated corporate sector debt.
In India, the rapid rebound in activity since mid-2020 has paused, with the resurgence of the
pandemic and renewed localised containment measures raising uncertainty and hitting mobility.
Higher commodity prices have also pushed up inflation, reducing household real incomes.
Monetary policy remains accommodative, with plans for gradual normalisation being put on hold,
but scope for additional fiscal support is limited. Provided the pandemic can be contained quickly,
GDP growth could still be around 10% in FY 2021-22 and 8¼ per cent in FY 2022-23, with pent-
up consumer demand, easy financial conditions and strong external market growth helping the
recovery to gain momentum.
In Brazil, the resurgence of the virus, renewed local mobility restrictions and the slow vaccination
rollout have checked the momentum of the recovery and hit confidence. Policy interest rates have
begun to rise, due to higher inflation, although real interest rates are still low. Fiscal space is limited,
but some support for incomes is provided by the new temporary programme of emergency benefits.
Provided the pandemic can be controlled, and the pace of vaccinations improved, GDP is projected
to rise by around 3¾ per cent in 2021 and 2½ per cent in 2022. Strong external demand is helping
to maintain export growth, and domestic demand – particularly household consumption – should
pick up gradually from the latter half of 2021.
Labour market conditions are projected to improve gradually. The unemployment rate in the OECD
economies is expected to fall by around 1 percentage point over the projection period, from just under
6¾ per cent in the first quarter of 2021 (Figure 1.10, Panel A). This will still leave unemployment above
pre-crisis rates in many countries, with continued labour market slack containing wage growth in 2021-22.
Employment growth is projected to recover steadily, rising by around 1¾ per cent per annum in 2021-22
in the OECD economies. In the United States, strong job creation is projected this year, helped by the
impetus provided by the American Rescue Plan, with employment rising by over 3½ per cent and the
unemployment rate declining by 1½ percentage points over the year to the first quarter of 2022. Smaller
improvements are projected in the euro area and Japan, reflecting the successful preservation of jobs
through policy support. Companies in many countries have considerable scope to meet improved demand
by expanding hours worked per employee, rather than the overall size of their workforce.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021 17
Figure 1.9. Global economic prospects are improving, but continued divergence is expected across
countries
A. World GDP B. OECD GDP
Index 2019Q4 = 100 Index 2019Q4 = 100
110 110 110 110
105 105 105 105
100 100 100 100
95 95 95 95
November 2019 projection November 2019 projection
December 2020 projection December 2020 projection
90 May 2021 projection 90 90 May 2021 projection 90
85 85 85 85
2020 2021 2022 2020 2021 2022
C. GDP in 2021Q4 relative D. GDP in 2022Q4 relative
to 2019Q4 to November 2019 projection
% difference % difference
China Turkey
Turkey Russia
United States China
India United States
World Germany
Australia Japan
Korea Canada
Indonesia Italy
Russia Total OECD
Total OECD Australia
Canada Euro area 17
Germany United Kingdom
Japan France
United Kingdom Korea
Brazil Brazil
Euro area 17 World
Saudi Arabia Saudi Arabia
France Argentina
Mexico Spain
Italy Mexico
Spain South Africa
South Africa Indonesia
Argentina India
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1
Note: The November 2019 OECD Economic Outlook projections are extended into 2022 using the November 2019 estimates of the potential
output growth rate for each economy in 2021.
Source: OECD Economic Outlook 109 database; and OECD calculations.
StatLink 2 https://stat.link/9x14pi
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 202118
By the end of the projection period, the employment rate in the median OECD economy is projected to still
be below that at the end of 2019 (Figure 1.10, Panel B), with diverse outcomes across countries. The
employment rate is projected to recover fully, on average, in those countries with relatively high
employment rates prior to the crisis. In contrast, the employment rate is projected to remain well short of
pre-pandemic levels in some countries with comparatively low pre-pandemic employment rates.
Participation rates also remain below the pre-pandemic level in many countries at the end of 2022,
including in the United States. In part, these gaps may reflect the sectoral mix of activities, but they also
point to the need for enhanced reforms to improve activation and job creation in many countries.
Although the projected pace of the recovery has improved from what appeared likely a few months ago,
with business investment growth in the OECD economies now projected to average 4¾ per cent per annum
in 2021-22, the risks of permanent costs from the pandemic remain high in many countries. Weaker capital
accumulation, lower employment rates, reduced participation rates, and some reductions in skills and
business efficiencies have all contributed to downward revisions to conventional but uncertain potential
output growth estimates since the start of the pandemic. A similar pattern is apparent in downward
revisions to consensus expectations for the level of output in the medium term (Box 1.2).
Figure 1.10. Labour market conditions are set to improve gradually
A. Unemployment rate B. OECD employment rates
% of labour force % of population aged 15-74
14 70 70
Median Lower quartile Upper quartile
OECD 68
12
United States
Euro area 66
10 10
Japan 65
64
8
62
6
5 60 60
4
58
2 56
55
0 0 54
2020 2021 2022 2020 2021 2022
Note: Panel B shows the median, lower quartile and upper quartile of employment rates amongst the OECD member states.
Source: OECD Economic Outlook 109 database; and OECD calculations.
StatLink 2 https://stat.link/1hstiz
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021 19
Box 1.2. Possible loss of potential output following the COVID-19 crisis
GDP plummeted in 2020 in most countries, following the COVID-19 outbreak, and restoring pre-crisis GDP
levels will take time in many of them. A key issue is the extent to which shortfalls may persist into the
medium term through reductions in supply potential. As past crises have shown, such reductions can be
substantial (Ollivaud and Turner, 2014). This box sets out the differences between the current OECD
potential output growth estimates for 2019-22 and the estimates made prior to the onset of the pandemic.
Although inherently uncertain at this stage of the recovery, the revisions suggest some scarring from the
pandemic in almost all economies.
The OECD estimates of potential output – a measure of what the economy can produce abstracting from
temporary cyclical fluctuations – are derived using an aggregate Cobb-Douglas production function with
three key factors, potential employment, the productive capital stock and trend labour efficiency (EFF)
(Chalaux and Guillemette, 2019). Evaluating potential output during the pandemic requires some difficult
judgements. The enforced closure of businesses due to containment measures can be viewed as a
reduction in supply that is reversed subsequently once they are permitted to reopen. A related approach,
reflected in the OECD estimates, is that the pandemic involves a large adverse shock to demand, with
government support programmes for jobs and incomes helping to preserve much of potential output while
containment measures are in force. This second approach reduces the cyclicality in potential output
estimates, but still allows for possible reductions in supply from factors such as lower capital accumulation,
longer spells of unemployment, skills loss, supply-chain adjustments, business failures and changes in
competitive pressures.
Though highly uncertain and subject to future revision, current estimates suggest that average annual
global potential output growth from 2019 to 2022 could now be over 0.5 percentage point weaker than
estimated prior to the pandemic (Figure 1.11, Panel A).1 If this lasts, and there are no offsetting policies,
global real output will be 3% lower than projected prior to the pandemic after five years, and about 5½ per
cent lower after a decade. These differences are distributed unevenly across countries, with small losses
in most advanced economies and some emerging-market economies, but sizeable losses in a number of
large emerging-market economies. The approach also reflects some changes to potential output estimates
that are not directly related to COVID-19, but these are generally small for most countries.2
Annual potential growth over 2019-22 in the median advanced and emerging-market economy
could have declined by 0.3 and 0.4 percentage point, respectively, implying an output loss of about
1.6% and 2.2% respectively after five years. Larger OECD countries appear more resilient in that
regard, with emerging-market economies tending to have the largest estimated negative impacts.
Amongst the major advanced economies, losses are estimated to be relatively small in Japan,
Canada and the United States. Declines in potential output growth in major euro area members
could be 0.3 percentage point per annum on average over 2019-22. The United Kingdom could
suffer the biggest reduction amongst G7 countries (a decline of 0.5 percentage point per annum),
in part reflecting the additional adverse supply-side effects from 2021 following Brexit
(Kierzenkowski et al., 2016; OECD, 2020b).
For the major emerging-market economies, the estimated reduction in potential output growth is
smaller for Brazil (0.2 percentage point per annum) and China. Most other countries appear to face
larger losses, especially India , Saudi Arabia and Argentina.
A cross-check on the possible medium-term implications of the pandemic can be obtained by looking at
how longer-term consensus forecasts have evolved since the pandemic began. Annual GDP growth
forecasts can be cumulated to obtain an implicit GDP level over time. Revisions to long-term growth
projections from Consensus Economics between January 2020 and April 2021 for selected countries also
imply that the GDP level in 2025 is now expected to be lower than prior to the pandemic in most major
countries, with the exception of the United States (Figure 1.11, Panel B). Again, G7 countries usually lose
less than large G20 emerging-market economies.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 202120
Figure 1.11. The medium-term output loss from COVID-19 is estimated to vary significantly across
countries
A. Revision to potential output growth estimates B. Revision to Consensus projections of GDP
over 2019-22 in 2025
% pts per annum % change in level
0.5 0.5 2
0.0 0.0 0 0.0
-2
-0.5 -0.5 -2.5
EFF
-4
-1.0 Capital stock -1.0 -5.0
Employment
-6
-1.5 Potential growth -1.5 -7.5
-8
-2.0 -2.0
OECD
-10 -10.0
EMEs
World
EA17
CHN
GBR
MEX
ARG
CAN
DEU
USA
BRA
SAU
FRA
JPN
AEs
IND
ITA
CHN
GBR
ARG
MEX
CAN
DEU
USA
SAU
BRA
FRA
JPN
IND
ITA
EA
Note: In Panel A, the revision is the difference in potential output growth per annum over 2019-22 between the current potential output estimates
and those made in November 2019. The world is computed from countries for which a potential output estimate is made, representing about
85% of global output. EMEs corresponds to the median amongst 16 emerging-market economies. AEs denotes the median advanced OECD
country. In Panel B, the revision corresponds to the difference in the GDP level implied by consensus expectations for GDP growth out to 2025
in April 2021 and January 2020.
Source: OECD Economic Outlook 106 database; OECD Economic Outlook 109 database; Consensus Economics; and OECD calculations.
StatLink 2 https://stat.link/fhqvd0
Looking in detail at the sources of the changes in OECD potential output growth estimates shows the
following:
Weaker capital stock growth accounts for about one-third (0.1 percentage point) of the revision to
the median advanced OECD country potential output growth estimates. The investment gap is
usually more pronounced for emerging-market economies, notably for Mexico and India.
The contribution from weaker sustainable employment growth is 0.1 percentage point for the
median advanced OECD country, and larger for Brazil (0.5), Italy (0.2) and the United Kingdom
(0.2). For Brazil and other emerging-market economies, this comes from weaker trend labour force
participation rates.
The decline in EFF growth accounts for the remaining part (0.1 percentage point) for the median
advanced OECD country. It is the main factor when the revision is large, notably for Argentina,
India and Saudi Arabia. The concentration of revisions to EFF growth in some countries reflects
the difficulty of projecting underlying EFF growth when observed output falls sharply relative to
observed factor inputs, as in 2020. Changes in hours worked per employee and the technologies
used, organisational efficiencies, the sectoral mix of activities, and competitive pressures at home
and abroad are all incorporated in this factor.
_________
1. Revisions to potential output growth in 2019 are included in the calculation as the filter-based estimates of the underlying trends for
employment and labour efficiency that year are partly affected by the inclusion of the data for 2020.
2. An alternative computation, looking at the difference between the pre-pandemic estimate of the change in average annual potential output
between 2015-18 and 2019-22 and the current estimate of this change, yielded broadly similar results.
OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021 21
Inflation is expected to increase temporarily but the longer-term outlook remains
uncertain, with upside risks
In most advanced and emerging-market economies, inflation has picked up since the last year in line with
the rise in oil and other commodity prices (Figure 1.12, Panel A), though it remains below pre-pandemic
levels. Temporary supply shortages in specific sectors, including semiconductors and shipping, and signs
of skills shortages for some small businesses, are also contributing to the higher input cost pressures
apparent in business surveys (Figure 1.12, Panel B; Box 1.3).3 In emerging-market economies, the past
depreciation of currencies and increases in indirect taxes and regulated electricity prices have also added
to price pressures. The improved prospects for a sustained global recovery have also pushed up
expectations of future inflation, particularly in financial markets.
Prices (especially of energy and food) have been volatile due to specific crisis-related factors and
measurement issues, making the identification of underlying price pressures difficult. Uncertainty about
underlying inflation has been high in all economies as collecting data on the prices of some services has
been complicated by containment measures, necessitating their extrapolation by statistical offices. In 2020,
in some cases, this led to an upward bias in inflation (Bureau of Labor Statistics, 2020; Eurostat, 2020b;
O’Brien et al., 2021). In contrast, significant temporary changes to consumption patterns, which were not
reflected in weights used to calculate the consumer price index, resulted in an underestimation of inflation.
This may be reversed in 2021 and 2022, as activity reopens where it is currently restrained. 4 Moreover,
the altered timing of seasonal sales and temporary VAT changes (for instance in Germany and several
other euro area countries) added to inflation volatility. 5
3
Global supply shortages in the semiconductor industry have resulted from the surge in demand for electronic
equipment, prompted by remote studying and working arrangements related to the COVID-19 pandemic and increased
mining of cryptocurrencies due to their high prices, and for cars. With little additional chip-making capacity expected
in the short term and sustained strong demand, supply constraints will persist for some time, possibly raising prices of
final consumer goods. For instance, in the United States, potential supply shortages in the semiconductor industry are
estimated in one study to boost year-on-year core inflation in 2021 by 0.1-0.4 percentage point (Goldman Sachs,
2021).
4
For instance, in France, the 12-month price increase in April 2020 would have been 1.1 percentage point higher if
the CPI weights had reflected the change in the structure of consumption (for instance, the 70%-90% decline in
transport, accommodation/catering and fuel consumption) rather than keeping the pre-COVID-19 consumption basket
(INSEE, 2020; Gautier et al., 2020). Such an upward bias is estimated at 0.2 percentage point for the whole euro area
(Kouvavas et al., 2020), 0.4 percentage point in the United Kingdom (NIESR, 2020), and 0.7 percentage point in the
United States (Cavallo, 2020).
5
For instance, in Italy, due to the delay of summer sales by one month, 12-month inflation temporarily increased by
1.2 percentage points in July 2020. Similar patterns were observed in January and February 2021. The temporary
reductions of VAT in the euro area, primarily in Germany, are estimated to have lowered HICP inflation in July 2020
by around 0.7 percentage point (Koester et al., 2020), and the reversal of tax changes added a similar amount to euro
area inflation in January 2021.
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